The pictured apartment building on Franklin Street in Brooklyn was acquired in 1991 by Mr. and Mrs. Jozef and Wieslawa Sokolowski, and Arkadiusz Wodkiewicz. The deed of conveyance was in their individual names, with handwritten inter-delineations recording that the Sokolowskis together hold a “50% interest” and Wodkiewicz the “remaining 50% interest”. The same three persons in their individual names also mortgaged the property in 2005.
If those were the only facts, we’d have to conclude that, after Mr. Wodkiewicz’s death in 2009, his estate would have the rights of a tenant in common, including the right to bring a partition action forcing a sale of the property. But those were not the only facts, which is how the Sokolowskis and the estate’s fiduciary found themselves embroiled in litigation over the ownership and disposition of the Franklin Street property.
Here are the additional facts: Concurrently with the 1991 deed, the three owners signed and filed a Business Certificate of Partnership in the name of J&J Real Estate Partnership, and also signed a Partnership Agreement providing:
- J&J’s purpose is to “hold real estate and at this time, it owns 223 Franklin Street and 225 Franklin Street, Brooklyn, New York.”
- The two Sokolowskis are deemed “one partner” holding a 50% “undivided interest in the partnership’s holdings.”
- All profits and losses are to be “equally divided between Sokolowski and Wodkiewicz” and all deductions for expenses and “carrying charges of partnership holdings including mortgage interest” are to be split 50/50.
- In the event of the “death of one of the Partners or the purchase of a partner’s interest by the other Partner, the value of such shall be the fair market value” based on the average of two appraisals obtained from “two independent business brokers.”
After trying unsuccessfully to reach agreement with the estate to acquire its 50% partnership interest, in 2012 the Sokolowskis filed suit seeking a declaration that J&J dissolved upon Wodkiewicz’s death and that the estate is obligated to sell its interest to the Sokolowskis at an appraised fair market value under the Partnership Agreement’s buy-out clause (read complaint here).
In their subsequent summary judgment motion, the Sokolowskis argued that the estate was required to sell its interest under the Partnership Agreement’s buy-out provision; that under Partnership Law §§ 62 and 73, the partnership dissolved upon Wodkiewicz’s death; and that the value of his interest became fixed at that time. They also submitted affidavits attesting to the partners’ mutual understanding when they entered into the Partnership Agreement that, in the event of a partner’s death, the surviving partner was entitled to purchase the deceased’s interest in the partnership. (Read here the Sokolowskis’ supporting memorandum of law.)
The estate’s opposition to the motion centered on its contention that the Franklin Street property, purchased by and titled in the names of the three individuals, was not a partnership asset. The Partnership Agreement, the estate argued, concerned only the management of the property and their division of the profits. The estate further argued that the agreement’s buy-out clause was irrelevant, as J&J never held the property’s title. In the event the court determined that the property was a partnership asset, the estate asserted its entitlement under Partnership Law § 73 to receive, at its option, interest on the value of the partnership interest from the date of dissolution or half J&J’s post-dissolution profits. (Read here the estate’s opposing memorandum of law.)
The Court’s Decision
The decision by Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest in Sokolowski v. Wodkiewicz, 2014 NY Slip Op 31709(U) [Sup Ct, Kings County July 3, 2014], cited precedents holding that property taken in the names of individuals may be shown to be partnership property based on circumstantial evidence, and that the names listed on a property’s deed are not conclusive. Applying this principle, Justice Demarest ruled in favor of the Sokolowskis, finding that the Partnership Agreement “clearly indicates that the partners intended J&J to hold title to the Property and the evidence demonstrates that they operated and managed the Property as a partnership asset.” She rejected the estate’s position, writing:
Additionally, [the estate] acknowledges that the partners intended the Property to be a partnership asset, but argues simply that the deed’s use of the partners’ individual names precluded the realization of that intent. . . . [T]his technical infirmity is insufficient to overcome the evidence showing the partners’ treatment of the Property as a partnership asset and thus raises no question of fact that would preclude granting the declaratory relief that [the Sokolowskis] seek.
The court was less sympathetic to the Sokolowskis’ position limiting the amount to be paid to the estate for its partnership interest to the date-of-dissolution value, i.e., without payment of interest or post-dissolution profits as provided by Partnership Law § 73. Here’s what Justice Demarest said in siding with the estate’s entitlement to choose interest or profits under the statute:
Where a partnership agreement contains terms that comprehensively dictate an agreed-upon course of action in the event of the retirement or death of a partner, including continuation of the business by surviving partners, those terms shall control and the provisions of § 73 shall have no effect.
Here, the Agreement’s Buyout Clause does not rise to the level of “a complete scheme for distribution of the profits and for determining the rights and obligations of the parties”. This clause merely dictates that, in the event of a buyout by continuing partners of the interest that belonged to a retired or deceased partner, (1) the price shall be fair market value and (2) fair market value shall be determined by averaging two appraisals by independent business brokers. This specification of the method by which the value of a departing partner’s share should be determined presents no inconsistency with Partnership Law § 73, and the omission of any reference to interest or profit sharing for the period between dissolution and the buyout’s consummation cannot be properly understood as a waiver of that statutory provision. If a deceased partner’s estate were deprived of the statutory right to interest or profits derived from the decedent’s partnership rights, continuing partners would lack any incentive to effect a timely buyout. [Citations omitted.]
Justice Demarest accordingly ordered the estate to sell its interest in J&J to the Sokolowskis for an amount to be determined as provided in the Partnership Agreement, by averaging two fair-market-value appraisals by licensed business brokers, to be valued as of Wodkiewicz’s date of death. She further ordered that the estate shall have the option of receiving either statutory interest upon the buyout amount or the portion of the profits realized from the estate’s rights in partnership property from the date of death through the conveyance’s completion.
Some Additional Observations
- I fancy myself a legal archeologist whenever I unearth a rare, new court decision involving a dispute between partners in a general partnership. As I’ve noted many times before, the use of general partnerships, which lack limited liability protection, has declined almost to the point of extinction (excepting professional partnerships) in favor of S corporations and LLCs. The partnership formed in the Sokolowski case pre-dated New York’s authorization in 1994 of LLCs, which have become the entity of choice for real estate holding companies.
- The partners in Sokolowsi could have done themselves a big favor, and might have avoided litigation altogether, had they addressed more explicitly in the Partnership Agreement the rights of a surviving partner to acquire a deceased partner’s interest, including detailed provisions for the election to purchase, the selection of appraisers, the appraisal parameters, and the terms of payment.
- I would never recommend a buy-sell provision like the one in Sokolowski, providing for the simple averaging of two appraisals where, presumably, each side picks its own appraiser. Such a provision almost always results in two appraisals at great extremes, as evidenced by the $2 million (Sokolowski) and $3.4 million (estate) appraisals obtained by them in 2012 apparently for negotiating purposes. Wiser alternatives include the joint selection of a single appraiser, or each side selects its own appraiser with the results averaged only if the appraisals are within X percent of each other (usually 10%) and, if not, the two appraisers select a third appraiser who chooses between the two, or does its own appraisal which is then reconciled with the first two, or issues a binding appraisal ignoring the first two. (Chris Mercer explains here in greater detail the varied roles of the third appraiser.)